May 15 (Bloomberg) -- European economic growth accelerated more in the first quarter than economists estimated as the strongest German expansion in 12 years powered the euro region through the global slowdown.

Gross domestic product in the 15 euro countries increased 0.7 percent from the fourth quarter, the European Union's statistics office in Luxembourg said today. The pace exceeded the 0.5 percent median of 32 forecasts in a Bloomberg News survey and the 0.1 percent growth rate in the U.S. Germany's 1.5 percent expansion was more than double what economists expected.

Sustained growth reinforces the European Central Bank's case for holding off lowering interest rates as it tries to tame inflation, which remained above the ECB's 2 percent ceiling for an eighth month in April. The bank may still face a quandary as evidence mounts that the expansion is weakening, even in Germany.

``It appears that the euro zone is still resisting the U.S. slowdown and the ongoing financial turmoil,'' said Oscar Bernal, an economist at ING Groep in Brussels. ``However, a slowdown in economic activity is likely to be in evidence over coming months.''

Demand from emerging markets and streamlined production methods introduced since the 2001 slump are supporting Germany as other economies weaken. Commerzbank AG today revised up its growth forecast for Europe's largest economy to 2.4 percent this year from 1.8 percent, paving the way for it to enjoy only its third soft-landing since 1960.

The euro rose more than half a cent to $1.5547 after the German figures were released, before retreating to $1.5492 at 2:53 p.m. in Frankfurt.

Eight Years

The European economy was also boosted by faster-than-expected first-quarter growth in France, which helped to compensate for the weakest Spanish expansion in almost eight years. Strength at the core of the 15-nation euro-area marks a difference from the last downturn, which was driven by contractions in France and Germany. The two nations account for almost half of the region's GDP.

They may not prove invulnerable for much longer as more recent data suggest Europe is stumbling as the U.S. slowdown and stronger euro weaken exports, and tighter credit and record commodity costs hurt consumers and companies. Germany's first- quarter expansion was driven by the construction industry, which benefited from a milder-than-usual winter.

`Last Hurrah'

Confidence among executives and households declined to the lowest in two and a half years last month, while industrial production fell in March for the first time in four months. Confidence in Europe's economy dropped to the lowest level in five years in the second quarter, the Munich-based Ifo institute said today, citing its quarterly World Economic Survey.

``This should be seen as a last hurrah for the euro-zone economy before it slips to below trend growth rates during the rest of this year,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam. James Nixon, an economist at Societe Generale SA in London, said the ECB may soon ``face a real threat of stagflation'' with stagnant growth and high inflation.

The ECB has so far signaled no rush to cut rates having kept its benchmark at a six-year high of 4 percent since June even as the U.S. Federal Reserve and Bank of England cut borrowing costs. Figures published today showed inflation remained above the ECB's ceiling in April, even as it eased to 3.3 percent from a 16-year high of 3.6 percent in March.

``There is definitely no room for the ECB to cut rates,'' said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.

`Less Flattering'

ECB President Jean-Claude Trichet said last week inflation will remain ``high'' for some time and moderate ``only gradually.'' Still, he said today in Vienna that ``the second quarter would be less flattering,'' even if today's figures confirmed the economy's ``resilience.''

ECB council member Yves Mersch said economic growth was boosted by ``special effects'' in the first quarter and may slow in the second.

From a year earlier, the euro-area economy grew 2.2 percent, according to today's report. The figures are the first estimate and the statistics office didn't publish a breakdown of the data.

Germany's first-quarter expansion was led by companies stepping up spending on machinery and construction. HeidelbergCement AG, Germany's biggest cement maker, said on May 8 that first-quarter sales almost doubled, led by eastern Europe and Asia.

In France, the economy grew 0.6 percent, double the prior quarter's growth and stronger than the 0.4 percent predicted by economists. Austria's economy expanded 0.8 percent.

At the same time, Spanish growth slowed to 0.3 percent from 0.8 percent as a credit shortage exacerbates a housing slump. Expansion in the Netherlands faded to 0.2 percent from 1.2 percent. While Italy doesn't release GDP data until May 23, some economists say it may already be in a recession.

To contact the reporter on this story: Simon Kennedy in Brussels at skennedy4@bloomberg.net; Gabi Thesing in Frankfurt at gthesing@bloomberg.net.

Last Updated: May 15, 2008 09:07 EDT